Authors advocate seven steps for effective board evaluations

Having a board evaluation is a regular event for most public companies. But is it a productive practice or just another corporate governance kabuki—a perfunctory, check-the-box exercise with no real impact? “Board Performance Evaluations that Add Value,” posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation, suggests that board evaluations can range from “counterproductive exercises, which exacerbate already fractious and poorly performing boards, to truly transformational change leading to superior governance and organisational outcomes.” But what leads to a superior outcome? The authors suggest that positive outcomes are more likely when boards understand the relative advantages and disadvantages of the different types of board reviews, and properly plan and implement the recommendations resulting from the board’s evaluation. Moreover, the authors contend that the evaluation process itself offers benefits as “an effective team-building, ethics-shaping activity. [The authors’] observation is that boards often neglect the process of engagement when undertaking evaluations; unfortunately, boards that fail to engage their members are missing a major opportunity for developing a shared set of board norms and inculcating a positive board and organizational culture. In short, the process is as important as the content.”

Having a board evaluation is a regular event for most public companies. But is it a productive practice or just another corporate governance kabuki—a perfunctory, check-the-box exercise with no real impact? “Board Performance Evaluations that Add Value,” posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation, suggests that board evaluations can range from “counterproductive exercises, which exacerbate already fractious and poorly performing boards, to truly transformational change leading to superior governance and organisational outcomes.” But what leads to a superior outcome? The authors suggest that positive outcomes are more likely when boards understand the relative advantages and disadvantages of the different types of board reviews, and properly plan and implement the recommendations resulting from the board’s evaluation. Moreover, the authors contend that the evaluation process itself offers benefits as “an effective team-building, ethics-shaping activity. [The authors’] observation is that boards often neglect the process of engagement when undertaking evaluations; unfortunately, boards that fail to engage their members are missing a major opportunity for developing a shared set of board norms and inculcating a positive board and organizational culture. In short, the process is as important as the content.”

To help companies achieve positive outcomes, the authors (from Effective Governance Pty Ltd.) propose a seven-step framework for effective board evaluations. The framework is designed to ask a series of “vital questions all boards should consider,” set forth below. By eliciting different responses depending on the circumstances, the framework can lead to a variety of review processes that “can range markedly in their scope, complexity and cost.” While the framework is sequential, the authors recognize that, “in practice, most boards will not follow such a linear process.”

What are our objectives?

The authors consider this first question—why is the board conducting an evaluation–to be the most important. Why is that? The authors believe that, unless the directors share a common rationale, “any evaluation is likely to meet resistance and/or fail.” Rather, with clear common objectives, the board can determine the scope and specific goals of the review, including the approach to be taken, the individuals to be involved, as well as allocations of time and money.

In practice, the authors suggest, the answer typically involves both “conformance” objectives (that is, “meeting the expectations of external scrutiny through compliance with various laws and following appropriate governance standards—whether mandated or self-imposed”) and “value adding” objectives (that is, “improving both organizational and board performance,” such as “taking proactive steps to ensure the board is effective in bringing new talent into the boardroom to maintain a proper mix of skills”). The authors contend that the objective is typically either to improve “organizational leadership” or to resolve a problem, such as a perceived deficiency in the board’s range of skills or competencies or in board motivation. The authors believe that, because board reviews can help to address problems or prevent differences of opinion from developing into real conflicts, many boards believe evaluations contribute significantly to group processes within the board.

Depending on the objective, other non-traditional types of board evaluations may be appropriate. For example, a board skills assessment might make the most sense if the goal is to identify skills gaps on the board. A board maturity assessment benchmarks the board’s practices against levels (basic to advanced) of recognized good practices related to topics such as the role of the board in relation to the CEO, risk practices, compliance, the conduct of board meetings and effective use of board committees. An external evaluator then assesses the board’s practices against the maturity model to arrive at a maturity rating. Taking into account the particular circumstances of the company, the directors also set a desirable maturity level, and the difference between the two levels can guide the board toward appropriate changes.

Who will be evaluated?

Just who is evaluated can depend on considerations of time and money, as well the objectives of the review. For example, a very specific objective may entail only a limited scope. Consulting firm Spencer Stuart reports that 98% of boards in the S&P 500 “conduct a board evaluation of some type, although only about a third review the board as a whole, individual directors and committees as part of the process.”

In this paper from the Rock Center for Corporate Governance at Stanford University, Board Evaluations and Boardroom Dynamics, the authors suggest that board self-evaluations aren’t all they’re cracked up to be, especially at the individual level. The authors report that the “typical director believes that at least one fellow director should be removed from their board because this individual is not effective. These are troubling statistics that suggest that many companies do not use board evaluations to optimize the contribution of their members.” However, a large percentage of companies do not even evaluate individuals: “Only half (55 percent) of companies that conduct board evaluations evaluate individual directors, and only one-third (36 percent) [of directors surveyed] believe their company does a very good job of accurately assessing the performance of individual directors.” And when you drill down, only 52% agree or strongly agree that their boards are very effective in dealing with directors who are under-performing or exhibiting poor behavior and less than a quarter (23%) strongly agree that their boards give direct, personal and constructive feedback to fellow directors — and 27% do not agree at all. (See this PubCo post.)

What will be evaluated?

In determining the criteria for the evaluation process, the authors observe that board evaluations are typically based on one of the leading frameworks, such as the National Association of Corporate Directors’ Key Agreed Principlesor the Business Roundtable Principles of Corporate Governance, although a realistic assessment of available time and resources may require limiting the list of topics investigated. process.

SideBar

According to the authors of this paper, it important for board evaluations to address board interaction and member participation. In essence, they argue, directors may have important “functional knowledge,” but they are not necessarily schooled in how best to contribute that information without stifling debate: directors “are not recruited to boards to provide the ‘last word’ on topics, with other directors deferring to their opinion. They are recruited to contribute knowledge that the group as a whole can use to make better decisions.” Survey data cited in the paper confirmed the prevalence of some director behaviors that could impede successful conduct of board meetings: 44% of directors surveyed very much or somewhat agree that members of their boards cross the line between oversight and actively trying to manage the company; 39% that board members derail the conversation by introducing items that are off topic; 35% that board members are distracted by technology or take calls during meetings; and 25% that board members are unprepared for meetings. A full 74% of directors surveyed very much or somewhat agree that board members allow, presumably inappropriately, personal or past experience to dominate their perspectives.

This survey data suggests perhaps that some directors may need to learn a few new behaviors to help them play well with others, including techniques such as asking the right questions in the right way, “not being directive, leading conversations rather than acting as ‘the expert,’ staying engaged,… building on the points of view of others,” entering the conversation using questions, setting the context when making comments, allowing others to participate and generally learning to “contribute,” rather than “win.”

Who will be asked?

While most board evaluations look only to the board for input, other sources of information, such as the CEO, other senior executives and management personnel and, in some cases, employees, or even external sources, such as shareholders and other key stakeholders (government agencies, major clients and suppliers) may have close enough ties to provide a different but useful perspective on board performance.

What techniques will be used?

Questionnaire-based surveys are “by far the most common form of quantitative technique used in board evaluations and can be an important information-gathering tool,” while qualitative research methods such as interviews (one-on-one or small-group) may be particularly useful to elicit more subtle perceptions. In addition, the authors suggest that board meeting observation can be a useful tool to evaluate boardroom dynamics or relationships between individuals, and document analysis of board materials, governance policies and similar documents can help to identify board processes that need improvement. Overall, the authors suggest, qualitative research is especially valuable to identify governance issues, but does require judgment and experience to properly review and analyze the information received. Although there is no one best methodology, the authors suggest that “there are advantages to be gained from combining a questionnaire with interviews. The questionnaire (most often delivered online) allows directors to benchmark the board along a series of dimensions (e.g. very poor to very good; 1 to 5; etc.), which allows directors to see where they have differing viewpoints from other directors. This can then be followed-up by interviews to allow directors to provide further context to the topics covered in the questionnaire and to raise areas of concern not covered in the survey.”

Who will do the evaluation?

Internal reviews—which can be conducted by one or more directors or governance personnel, such as the corporate secretary—offer the benefits of confidentiality and low cost; internal reviewers, however, “may lack the skills required (e.g., interview technique, survey design) [and] are likely to have a bias (often unconscious) that carries over into the assessment….” Also, an internal review may be a less transparent process or may not satisfy the objectives of the review. In addition, there is the risk that “the review is likely to achieve little if the reviewer (e.g., the chair) is the source of the problems.”

The authors advise that external reviews—typically conducted by outside consultants or law firms—can offer a number of advantages:

“a good external facilitator is more likely to have undertaken a significant number of reviews and will often provide important insights into techniques, comparison points and new ideas;

an external party often aids transparency and objectivity;

a good external party can play a mediating role for boards facing sensitive issues through being the messenger for difficult matters involving group dynamics and egos.”

Whether or not evaluations are conducted by external reviewers may depend on internal reviewer experience, budget for the review and complexity of the issues. The authors observe that boards frequently alternate annually between internal and external reviews.

What will we do with the results?

Internally, companies will want to communicate the results to the entire board in some form. In addition, where the objective is to determine ways to enhance governance, companies may want to share the results with any governance personnel who may be involved, or, where the objective is to enhance the quality of board-management relationships, the company may want to provide a relevant summary of the evaluation to senior management. In determining the level of external disclosure (if any) of the results, the company must balance the need for protecting the confidences of directors with need for transparency for the company’s stakeholders. For example, the authors suggest that an appropriate external communication might “outline how the evaluation was conducted (e.g. internal or external review), the focus of the review (e.g. role fulfilment) and, perhaps, some of the major outcomes (e.g. identified need to further focus on strategy or requirements for new skills on the board).”

Implementing the outcomes

The authors caution that failure to implement any agreed actions or enhancements can lead participants to ultimately view the exercise as a waste of time and, presumably, dampen their enthusiasm for future board evaluations. Tracking implementation of milestones on board agendas is an approach taken by many boards. According to the authors, PwC reports that, in 2017, 68% of public company directors in the U.S. say that the board has taken action based on the results of their last board review, an increase from the 49% from PwC’s survey in 2016.

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